Expecting the unexpected is a matter of fiscal responsibility that is far too often ignored even by otherwise responsible people. Auto breakdowns, lost income, sickness, and necessary home repairs are just a few of those unexpected emergencies capable of leaving your family in debt. Instead of using the money saved up for the next vacation or geothermal HVAC installation, it makes sense to prepare for emergencies separately by establishing a designated liquid savings account.
Not having an account in place often means those emergencies create a lot of stress. People under stress may overlook other resources available for specific emergencies. Planning ahead means being aware of options and creating alternative options before the worst happens.
Establishing an Emergency Fund
For beginners, the first step to creating an emergency fund
is setting your budget. This is simply a categorized listing of income and expenses for any typical month. Items paid on longer scales, such as 6-month auto premiums, should be divided out between the relevant number of months. Several websites and classes from non-profit organizations are available, if you need help setting up a budget.
For those with a budget, emergency planning will either mean reducing the amount put towards savings
each month or taking money from other locations. The goal should be to set aside enough cash for three months in a liquid, interest-bearing account. Excess funds can be safely stored in higher interest accounts with less liquidity.
If reigning in spending or savings to establish an emergency fund is too difficult, it is time to either analyze the budget again or look for unconventional income sources. One popular idea is to sell items no longer needed through a yard sale or online service, such as eBay or Amazon. Another idea is to cash out poorly performing investments. Any investments that have lost value will provide a tax break, and money recouped from cashing out can be diverted to the emergency fund.
Understanding Your Resources
Most people are burdened with paperwork, and it can be hard to keep track of all the memberships, warranties and insurance policies that provide protection from emergencies. Instead of waiting for the computer or other device to breakdown, create a special place for all the documents to be reviewed periodically. Home policies, renter’s insurance, lease agreements, electronics and auto warranties, and auto club membership information are some of the items best stored in an easy to access location.
If you’re going through an emergency now, or one ironically occurs while you are planning, it makes sense to have an idea of debt options. All types of debt are different, and choosing the wrong option to pay for an emergency can end up raising the cost significantly. Make a list of potential sources for no-interest loans, such as family or close friends. Next consider low-interest credit options, including newer credit cards still in the introductory period, mortgage refinancing, or a personal bank loan. If you must rely on a payday loans
or other high-interest option, budget this item for prompt repayment.
Going into debt is all too common, and this is regularly proven by financial experts. It is easy to begin relying on fast payday loans and other types of debt, but this will hurt in the long run. The best way to avoid the debt and stress commonly associated with emergencies is by establishing an emergency fund.